Mitigate Risk in the S&P 500 and Derive Income From This ETF

In a risky market environment like today’s, it’s imperative to get proper hedging, but with safe haven assets like bonds heading lower, it helps to get strategic. This is where investors can benefit from an exchange traded fund (ETF) like the Global X S&P 500 Risk Managed Income ETF (XRMI), which has a built-in hedging component.

This ETF employs a protective net-credit collar strategy for investors seeking the income characteristics of a covered call fund while mitigating the risks of a major market sell-off with a protective put. XRMI seeks to achieve this outcome by owning the stocks in the S&P 500 Index (SPX), while buying 5% out-of-the-money put options on SPX and selling at-the-money call options on the same index.

Income can also be derived at the same time, giving fixed income investors an alternative to bonds. As opposed to the S&P 500’s loss of 17% year-to-date, XRMI is down 10%.

XRMI highlights:

  • Alternative income source: XRMI seeks to generate an alternative source of income by selling covered calls.
  • Risk-minded approach: XRMI buys protective puts to mitigate the risks of a major market sell-off.
  • Monthly distributions: XRMI expects to make distributions on a monthly basis.

XRMI Chart

For Targeted Exposure to the Nasdaq 100

The tech sector has been one of the most volatile this year, as evidenced by the Nasdaq 100’s 27% loss year-to-date. However, add a similar strategy of QRMI to the Nasdaq 100 and you get the Global X Nasdaq 100 Risk Managed Income ETF (QRMI), which is down just 12% in comparison.

QRMI seeks to offer passive investment results that correspond to the underlying index, the Nasdaq-100 Monthly Net Credit Collar 95-100 Index. This index measures the performance of an options collar strategy that is applied to the Nasdaq 100 Index, using a mix of short (sold) call options and long (purchased) put options.

The fund uses a 5% long position on out-of-money put options and a short position in at-the-money call options on the securities in the parent index. The underlying index takes long positions on a monthly basis with monthly put options that have an exercise price close to 5% below the current market price of the parent index and monthly call options with an exercise price at the current market prices of the parent index.

^NDX Chart

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